Uniform Taxation in Agriculture: Opportunities and Challenges

Syllabus: GS3/Agriculture

Context

  • India’s agricultural sector is a cornerstone of its economy, contributing significantly to GDP, employment, and livelihoods. However, inefficiencies, price fluctuations, and policy inconsistencies plague the sector.
    • A uniform taxation system for agriculture has been proposed as a solution to these issues, but it carries both opportunities and challenges.

Historical Context of Agricultural Taxation in India

  • Pre-Colonial Era:
    • India’s economy was predominantly agrarian, with local rulers collecting land revenue as a primary source of income.
    • Revenue systems were often based on local customs and practices, with sharecropping and other arrangements in place.
    • Tax rates and systems varied regionally, often dependent on the local ruler’s policies.
  • Colonial Period:
    • During British rule, agriculture became heavily taxed under exploitative revenue systems.
      • Permanent Settlement (1793): Introduced by the British in Bengal, landlords were tasked with collecting taxes, often at fixed rates. This system led to the exploitation of farmers and widespread rural distress.
      • Ryotwari System: Introduced in southern and western India, farmers (ryots) directly paid taxes to the British, often based on the assessed productivity of their land.
      • Mahalwari System: In northern India, the tax was collected from entire villages (mahals), which were collectively responsible for paying revenue.
    • Impact on Farmers: Excessive taxation rates often exceeded 50% of the produce.
      • Frequent crop failures and inability to pay taxes led to indebtedness and land loss
      • These systems prioritized revenue extraction over agricultural development, leaving the rural population impoverished and vulnerable.
  • Post-Independence Era: 
    • To address the historical injustices of colonial rule, the Indian government exempted agricultural income from taxation under Section 10(1) of the Income Tax Act, 1961.
    • This move was aimed at relieving farmers from financial burdens and encouraging agricultural growth.
    • While agricultural income was exempt from central taxation, states were given the authority to tax agricultural income. However, most states chose not to impose such taxes or restricted them to specific activities like plantation crops.
    • Green Revolution (1960s): While taxation was largely absent, subsidies, and minimum support prices (MSPs) were introduced to promote agricultural productivity and ensure food security.
  • Contemporary Challenges: 
    • Challenges in Taxation: Agricultural income tax exemption has been misused for tax evasion, with non-agricultural entities disguising income as agricultural.
      • State-level agricultural taxes, where implemented, remain fragmented and inconsistent.
    • Policy Discussions: Proposals to tax agricultural income above a certain threshold have faced resistance due to concerns about farmer distress and political opposition.
Agriculture in India
– It is primarily a State Subject in Schedule VII of Indian Constitution. It covers agricultural education and research, protection against pests, and prevention of plant diseases.
1. It means that state legislatures have the exclusive power to legislate on matters related to agriculture under normal circumstances.
2. Some aspects like trade and commerce fall under the Concurrent List.
Directive Principles: Article 48 of the Constitution directed the state to organize agriculture and animal husbandry on modern and scientific lines, reinforcing the government’s commitment to supporting the sector.
Some Facts
GDP Contribution: 18.2% (2023-24).
Employment: Agriculture employs nearly 45% of India’s workforce. 
Livelihood: About 42.3% of India’s population depends on agriculture for their livelihood.

Arguments for Uniform Taxation

  • Equity and Fairness: Proponents argue that uniform taxation would address the inequities in the current system, where non-agricultural incomes are taxed while agricultural incomes are not.
    • This disparity has led to tax avoidance and evasion, with some individuals disguising non-agricultural income as agricultural income to benefit from tax exemptions.
  • Revenue Generation: Uniform taxation could provide a significant source of revenue for both state and central governments.
    • It could be reinvested in the agricultural sector to improve infrastructure, research, and support services.
  • Data Collection and Governance: Implementing a uniform tax system would necessitate better data collection and record-keeping, leading to improved governance and policy-making.
    • Accurate data on agricultural incomes would help in designing targeted subsidies and support programs.
  • Curbing Tax Evasion: There are concerns that some non-agricultural entities misuse the exemption to evade taxes by declaring non-agricultural income as agricultural income.
  • Enhanced Market Efficiency: Uniform taxation would facilitate smoother interstate trade by removing barriers and reducing price disparities. This would lead to more efficient markets, where supply and demand can be balanced more effectively.
  • Mitigation of Price Fluctuations: With a uniform tax system, the volatility in agricultural prices could be reduced. This would provide more stable incomes for farmers and more predictable prices for consumers.
  • Encouragement of Entrepreneurship: Uniform taxation can foster a competitive environment, encouraging innovation and investment in the agricultural sector.
    • It could lead to increased productivity and the development of value-added agricultural products.

Challenges and Concerns

  • Burden on Farmers: Critics argue that taxing agricultural income could place an additional financial burden on farmers, many of whom are already struggling with low incomes and high input costs.
    • It could exacerbate rural distress and lead to increased farmer suicides.
  • State Revenue Concerns: States rely on local taxes for revenue. Transitioning to a uniform tax system may lead to revenue losses, making states hesitant to adopt the change.
  • Implementation Issues: The diverse nature of agricultural activities across different states makes uniform taxation challenging to implement.
    • States with varying levels of agricultural productivity and income may resist a one-size-fits-all approach.
  • Political and Stakeholders Resistance: The proposal for uniform taxation is likely to face political resistance, particularly from states that view it as an encroachment on their fiscal autonomy.
    • The federal structure of India requires careful negotiation and consensus-building to implement such reforms.
    • Various stakeholders, including local traders and middlemen, benefit from the current system.
  • Infrastructure and Technology: Implementing a uniform tax system requires robust infrastructure and technology to ensure seamless integration and compliance across states. This can be a significant logistical challenge.
  • Initial Implementation Costs: The initial costs of setting up a uniform tax system, including technology, training, and administrative changes, can be substantial.

Recent Discussions and Proposals

  • NITI Aayog: It suggested that agricultural income above a certain threshold should be taxed to curb tax evasion and increase revenue. 
  • A nominal fee for administrative purposes, like collecting real-time data, could be beneficial. It aligns with the ‘One Nation, One Tax’ principle, which could improve governance, mitigate food inflation, and stabilize price fluctuations.

Conclusion

  • Uniform taxation of the agricultural sector in India presents both opportunities and challenges. 
  • While it promotes equity, generates revenue, and improves governance, it also risks burdening farmers and faces significant implementation hurdles. 
  • A balanced approach, considering the unique needs and conditions of different states, is essential for any successful reform in this area.
Daily Mains Practice Question
[Q] Discuss the arguments for and against the implementation of uniform taxation on the agriculture sector in India. Analyze the potential economic, social, and political implications of such a policy change.

Source: IE